thailand industry focus thailand oil refinery us shale drillers if prices move towards more...

ed-CK / sa-CS, PY

Share price catalyst remains muted

Lack of share price catalyst

4Q16E profit should pick up q-o-q

Upgrade IRPC to BUY

BCP remains our top pick

Lack of share price catalyst. The share price performance of

Thai oil refiners in 2016 was mixed with disappointment for big

names like Thai Oil (TOP), up only 9.5%, and our top pick,

Bangchak Petroleum (BCP), up only 1.5%. This was far lower

than the Energy sector index which surged 38%, driven by

upstream and integrated oil players. This reflected weaker

refining margins, compared with the remarkable year in 2015.

There should be no difference for this year with refining

margins to improve only marginally from 2016 but higher oil

prices could increase the operating cost of these companies.

Hence, we are NEUTRAL on oil refinery stocks with BCP as our

top pick due to its undemanding valuation and attractive yield.

4Q16E preview. We estimate the 4Q16 earnings of the four

Thai oil refiners under our coverage using available information

on hand. We expect these companies to report stronger profit

q-o-q in a range of 21-29% due to higher refining margins and

inventory gains. The y-o-y performance was mixed, with BCP

and IRPC expected to show strong y-o-y improvement while

TOP’s profit is expected to be flat.

TP is raised by 13-18% and rating upgrade for IRPC. We

have bumped up the TP of three stocks, i.e. IRPC, PTTGC and

TOP, by 13-18% as shown in page 5. We apply a higher PBV for

2017F, which is derived from the previous cycle of oil price

recovery. We maintain our TP for BCP as it already reflects such a

multiple. With the new TP, we upgrade IRPC from HOLD to BUY

as the upside potential is widened. This also reflects more a

positive view on its earnings outlook given that the benefit from

its new plant will be more apparent in 2017F.

BCP is top pick as the laggard with undemanding

valuation. We still like BCP for its cheap valuation – at only

7.8x PE in 2017 – and dividend yield of 5.1%. Its profitability

will stay solid in 2017, driven by higher utilisation rate of its

refinery, following the planned shutdown in early 2016. Its

marketing business will remain strong on higher demand and

more expansion. We also like PTTGC, though its share price

has increased 11% to date but the current P/BV is still below its

historical average.

SET : 1,589.29

Analyst Chaipat THANAWATTANO +66 2657 7827 [email protected]

STOCKS

Source: DBS Vickers, Bloomberg Finance L.P.

Closing price as of 8 Feb 2017 Bangchak Petroleum Pcl : BCP operates a refinery business with 120kbd capacity. The company also has its own retail gas stations, and recently expanded into solar farm, biodiesel, and ethanol.

IRPC PCL : IRPC is a fully integrated refinery and naphtha-based petrochemical producer. Its refinery is the second largest one in Thailand.

Thai Oil PCL : Thai Oil is Thailand's largest refinery and the flagship refinery under PTT group. The refinery is integrated with petrochemicals and lube base plants. TOP also invests in power and businesses.

PTT Global Chemical : PTTGC operates integrated petrochemical complex, mainly gas-based olefins crackers and ethylene derivatives. The company also owns 145kbd-oil refinery and oleo-chemical plants.

Share Price Performance

Source: DBS Vickers

DBS Group Research . Equity

9 Feb 2017

Thailand Industry Focus

Thailand Oil Refinery

Refer to important disclosures at the end of this report

Price Mkt Cap Target Price Performance (%)

Bt US$m Bt 3 mth 12 mth Rating

Bangchak Petroleum Pcl 34.50 1,356 39.00 5.3 18.0 BUY IRPC PCL 5.25 3,063 6.00 8.5 24.4 BUY Thai Oil PCL 72.75 4,237 77.00 1.4 12.8 HOLD PTT Global Chemical 70.25 8,946 79.00 18.6 32.6 BUY

Industry Focus

Stronger GRM could support 4Q16F profit

Singapore GRM continued to improve in 4Q16. The gross

refining margin (GRM) in the Singapore market improved

strongly by 31% q-o-q to US$6.74/bbl in 4Q16, up from the

average US$5.15/bbl in 3Q16. This was supported by seasonal

demand, especially for middle distillate products (diesel and jet

fuel) and fuel oil for electricity generation. A higher crack spread

for gasoline after a hiccup in 3Q16 was also behind the sharp

increase of refining margin in 4Q16 despite crude cost

increasing by 11.2% q-o-q.

Figure 1: Gross refining margin (Singapore)

Note: Dubai Crack Singapore Refining Margin Source: Datastream, DBS Vickers

Although Singapore GRM continued to rise to an average of

US$6.81/bbl in Jan-Feb 17, this was much below US$9.28/bbl

during the same period of last year when the crack spread of

gasoline was much better at >US$21/bbl, compared with

US$16.2/bbl in 2017. Hence, Singapore GRM has started the

year at the low-end of the 5-year range, as shown in Figure 1. In

addition, demand for middle distillate products was not strong

enough to buoy the refining margin during the winter of

2016/17. The average crack spread of gasoil edged down from

US$11.3/bbl in 4Q16 to US$11.1/bbl for the first five weeks of

this year.

Higher crack spread for gasoline was the key driver for GRM.

After falling back sharply in 3Q16 to US$11.3/bbl, the crack

spread of gasoline has continued to recover to US$14.6/bbl in

4Q16 and US$16.1/bbl in Jan 17. Higher demand and supply

disruption were the key driving factor for this favourable crack

spread. Demand growth for gasoline could continue to outpace

supply growth in 2017, according to a leading industry

consultant. Hence, we expect gasoline to continue driving

refining margins in 2017.

Figure 2: Refined oil product crack spread (above Dubai)

Source: Datastream, DBS Vickers

Wider inventory gain is expected for 4Q16-1Q17. Although

crude oil prices have continued to improve since 4Q16, the

magnitude of inventory gains for Thailand’s oil refiners remained

limited, in our view. We estimate the inventory gains of

c.US$2.5-2.7/bbl for 4Q16 and US$0.6/bbl for 1Q17 if oil prices

remain stable at the current level. Nonetheless, this would show

some improvement from the inventory gain of US$0.7-0.9/bbl in

3Q16.

Figure 3: Benchmark oil prices

Source: Bloomberg Finance LP, DBS Vickers

Refining margin could pick up slightly on more balanced

market. With the stable growth of demand for refined oil

products, we expect GRM to pick up slightly in 2017F to

US$6.5-6.8/bbl. The key driver could be higher demand for

diesel and jet fuel, which accounts for more than half of Thai oil

refiners’ product yield. On the supply side, we expect net

additional capacity to remain slightly lower than demand

growth, with the capacity in China as a swing factor, mainly the

teapot refineries. The key risk for the industry is volatile oil prices

triggering inventory gains or losses.

Industry Focus

Figure 4: Average gross refining margin (Singapore)

Note: Dubai Crack Singapore Refining Margin Source: Datastream, DBS Vickers

Oil price recovery would continue in 2017F. The DBSV regional

oil and gas team still expects Brent oil price to increase to a

range of US$55-60/bbl in 2017F, up from US$45-55/bbl in

4Q16. OPEC’s recent agreement to cut supply from Jan 17 to

Jun 17, joined by some key non-OPEC producers is likely to

accelerate oil rebalancing (achieving equilibrium in 1Q17) and

price recovery. Confidence has also been boosted by Saudi

Arabia’s tone for deeper cuts. Nonetheless, we remain cautious

on the longer-term price assumption at US$60-65/bbl. We think

that the real impact of OPEC’s supply cut still has to be seen,

depending on whether OPEC could control production within

the agreed quota. Also, this still depends on the response from

US shale drillers if prices move towards more lucrative levels of

US$60/bbl, and the energy policy of the new US President

Donald Trump. Further, the US dollar appreciation and interest

rate hikes may add to pressure on oil prices as well. The

wildcard remains the shift in geopolitics under President Donald

Trump. The higher oil price could boost non-recurring benefit

for oil refiners from inventory gains. Nonetheless, in the longer

term, this could adversely affect their refining margin due to

higher fuel cost for refinery and fuel loss in the process, ranging

from 2-6% of crude intake, depending on the efficiency of the

refinery and integration of refinery and petrochemical plants.

Higher oil price still has marginal impact on fuel cost. We think

that the recent oil price recovery should not have much impact

on fuel cost for oil refiners. Dubai oil price has increased

US$22.8/bbl from its low in Jan 16, implying a lower refining

margin by US$0.7/bbl due to higher fuel cost, assuming that

fuel used in the refinery and loss during the refining process

accounts for 3% of crude intake. Nonetheless, this should be

offset by a lower crude premium by US$1.6/bbl during the

period – hence, there is still a net positive margin of US$0.9/bbl

for overall refining activities.

Crude premium could soften further on higher production of

light products in the US. Crude premium has edged up from

US$1.8/bbl in 3Q16 to US$2.1/bbl in 4Q16. Nonetheless, as the

oil price recovery has encouraged more production of light

crude oil, we believe that this could help narrow the gap

between light and heavy crude oil prices. As shown in the figure

below, the price gap between Murban (light crude oil) and

Dubai (heavy crude oil) prices has narrowed further to an

average of US$1.6/bbl in 1Q17. This could be positive for Thai

oil refiners, which in practice use other types of crude oil as

feedstock, including Murban and Arab Light, which offer better

product yield to match the configuration of refinery and

domestic demand for refined oil products. We expect this

positive trend to continue in 2017 given that the oil price

recovery would encourage more production from non-OPEC

countries, especially for shale oil in the US.

Figure 5: Crude premium*

Note: * Spread between Murban – Dubai crude oil Source: Bloomberg Finance LP, DBS Vickers

Para-Xylene spread narrowed q-o-q. PX-ULG95 spread has

narrowed by 16% q-o-q to US$297/t in 4Q16, the weakest

quarter of the year. This reflected higher feedstock cost, i.e.

ULG95 which was closely linked with crude oil prices, and a

wider crack spread of ULG95 above crude oil price on higher

demand. PX price has edged up 1.3% q-o-q, even though new

supply has entered the market from India’s Reliance. The first

phase of this plant with a capacity of c.800k tpa (tons per

annum) has started commercial operation in Nov 16 and the

larger capacity of second phase at 1.45mtpa is scheduled to

come online in 1Q17. This could remain the key drag on PX

spread for the rest of the year. More PX capacity from Petro

Rabigh in Saudi Arabia will put more pressure on the spread

from 2Q17 onwards.

Industry Focus

Figure 6: Para-Xylene product spread (PX-ULG95)

Source: Datastream, DBS Vickers

4Q16F earnings preview. Most of Thailand’s oil refiners under

DBSV coverage are expected to report stronger profit q-o-q in a

range of 21-29% due to higher refining margins and inventory

gains. The y-o-y performance was mixed, with BCP and IRPC

expected show strong y-o-y improvement while TOP’s profit is

expected to be flat. The details on each company are shown in

Figure 9 below.

Figure 7: Market GRM comparison (9M16)

Source: Company data, DBS Vickers

Valuation

We have bumped up the TP of three stocks, i.e. IRPC, PTTGC

and TOP, by applying a higher PBV for 2017. This PBV multiple is

derived from the previous cycle of oil price recovery. We

maintain our TP for BCP which already reflects such a multiple.

BCP remains our top pick for the sector on its attractive

valuation and share price performance. We expect the upward

earnings momentum to continue in 2017F as a result of planned

shutdowns in 2016. We expect its refinery to operate at an

average capacity of c.105-110kbd in 2017F, up from 98kbd in

2016 if the market GRM stays at around US$6-7/bbl. We believe

the market’s pessimism on its E&P segment could be eased

given the better oil price outlook. Nonetheless, the upside

potential to our TP for BCP, IRPC and PTTGC looks indifferent

after the TP revision for the latter two stocks. We are more

positive on IRPC and rating upgrade from HOLD to BUY. We

think that the positive impact from its new plant under the

Upstream Project for Hygiene and Value Added Products (UHV)

project would be more apparent in 2017F.

Figure 8: Target price and rating changes

Company Target price Rating

Previous Current % change Previous Current

BCP 39.00 39.00 0.0 BUY BUY

IRPC 5.30 6.00 13.2 HOLD BUY

PTTGC 69.00 79.00 14.5 BUY BUY

TOP 65.00 77.00 18.5 HOLD HOLD

Source: DBS Vickers

For PTTGC, we maintain our BUY call on the stock on better

outlook for ethylene and its derivatives on the back of a more

balanced demand-supply situation. Its earnings growth could be

strong y-o-y, following several unplanned outages in 2016.

PTTGC’s valuation is also attractive, compared with its regional

peers.

Figure 9: Share price performance

Source: Bloomberg Finance LP, DBS Vickers

We maintain our HOLD rating for TOP due to its highest PBV

multiple for 2017 while it could offer the best dividend yield

among local peers. Its earnings could be dragged by the

weaker spread for aromatics products due to huge capacity

additions by regional players.

Nonetheless, we believe that Thailand’s oil refinery stocks are

still trading at more attractive levels than regional peers with

the average P/E for 2017F at 8-11x, compared with the

regional average of 12x, with more generous dividend yields

of 3.6-5.3% vs. regional peers’ 3.1%.

Industry Focus

Figure 10: Preview 4Q16F – Thai oil refiners

Company Bt, m 4Q15 3Q16 4Q16E y-o-y% q-o-q% Comment

BCP Sales 35,136 36,686 39,142 11.4% 6.7% We expect BCP’s base GRM to improve slightly from

US$5.6/bbl in 3Q16 to US$6.3/bbl in 4Q16, in line with

the market. Its marketing margin of Bt0.8/litre could also

be sustained in 4Q16. We believe the company would

continue to operate its refinery at a high utilisation rate of

>95%, based on nameplate capacity of 120kbd to achieve

the target crude run of 98kbd for full-year 2016, down

from 113kbd in 2015 due to 45-days planned

maintenance shutdown in 1Q16. Apart from better GRM,

its net profit is expected to improve q-o-q on inventory

gains.

EBITDA 1,586 2,779 3,721 134.6% 33.9%

Core profit 1,614 1,402 1,067 -33.9% -23.9%

Net profit (112) 1,178 1,519 nm 28.9%

EPS (Bt/share) (0.08) 0.86 1.10 nm 28.9%

IRPC Sales 49,024 45,673 52,960 8.0% 16.0% IRPC’s earnings performance is likely to improve further q-

o-q due to higher GRM, driven by wider cracker spread of

fuel oil and gasoline. Meanwhile, the product spread of

petrochemical segment has weakened q-o-q, mainly

Propylene and Polypropylene (PP) whose spread declined

19% and 9% q-o-q, respectively. Its profit would also be

supported by an inventory gain of c.Bt530m due to higher

oil prices. We estimate its utilisation rate to remain

unchanged from 3Q16 as the operation of the UHV unit

commenced in 2Q16.

EBITDA 2,066 3,098 4,314 108.8% 39.2%

Core profit 3,197 1,768 1,820 -43.1% 3.0%

Net profit 447 1,307 1,620 262.5% 24.0%

EPS (Bt/share) 0.02 0.06 0.08 262.5% 24.0%

PTTGC Sales 96,088 89,714 106,802 11.2% 19.0% We expect PTTGC to report better performance in 4Q16,

both y-o-y and q-o-q. The net profit could reach Bt7.5bn,

the highest quarterly number for 2016, driven by better

product margins and inventory gains. We expect the

company to maintain a high utilisation rate for its refinery

at c.100% in 4Q16. The operation at its ethylene crackers

should also be maximised to reap benefits from the

planned shutdowns of other producers in Thailand and

strong demand. Although the product spread for

aromatics declined 11% q-o-q but this could be offset by

higher sales volume given the planned shutdown for some

of the aromatics plants in 3Q16.

EBITDA 10,386 12,210 14,413 38.8% 18.0%

Core profit 3,672 5,238 5,497 49.7% 4.9%

Net profit 4,690 6,226 7,529 60.5% 20.9%

EPS (Bt/share) 1.04 1.38 1.67 60.5% 20.9%

TOP Sales 68,446 68,476 77,260 12.9% 12.8% TOP’s net profit is expected to improve 27.4% q-o-q due

to better GRM and inventory gain of c.Bt2bn in 4Q16

while we estimate that it had to book a foreign exchange

loss of Bt750m on its USD loans. We expect the company’s

market GIM to improve slightly from US$6.7/bbl in 3Q16

to US$6.9/bbl in 4Q16, reflecting better refining margins

and the lower product spread of aromatics. The operation

of all three main units, i.e. oil refinery, aromatics and lube

base oil should be normalised in the last quarter of 2016.

EBITDA 5,114 5,118 8,697 70.1% 69.9%

Core profit 2,378 2,216 4,583 92.7% 106.8%

Net profit 3,749 2,941 3,746 -0.1% 27.4%

EPS (Bt/share) 1.84 1.44 1.84 -0.1% 27.4%

Source: Company, DBS Vickers

Industry Focus

Figure 11: Peers Comparison Market PE P/BV EV/EBITDA Div Yld ROE

Cap (x) (x) (x) (%) (%)

BB Ticker Name US$m 16F 17F 16F 17F 16F 17F 16F 16F

CTX AU Caltex Australia 5,679 14.5 13.0 2.7 2.4 8.1 7.5 3.6 19.2

WPL AU Woodside Petroleum 20,275 23.5 18.6 1.8 1.7 9.3 8.0 2.7 5.8

135 HK Kunlun Energy 6,305 10.9 10.8 1.0 0.9 4.5 4.6 2.4 9.1

386 HK China Petroleum & Chemical-H 101,476 16.0 12.8 1.0 1.0 5.8 5.2 2.9 6.2

933 HK Brightoil Petroleum Holdings 3,118 29.8 18.3 2.0 1.8 8.9 6.9 1.3 7.3

BPCL IN Bharat Petroleum Corp 15,379 12.9 11.9 2.9 2.5 8.9 7.9 2.5 25.6

HPC LIN Hindustan Petroleum Corp 8,429 10.3 10.3 2.7 2.3 7.1 7.2 2.5 29.7

IOCL IN Indian Oil Corp 28,228 9.3 9.6 2.0 1.8 7.2 7.2 3.1 22.1

RIL IN Reliance Industries 49,619 11.1 10.9 1.2 1.1 10.0 8.3 1.2 11.0

1605 JP Inpex Corp 13,982 53.8 24.2 0.6 0.5 4.6 3.2 1.7 0.8

5012 JP Tonengeneral Sekiyu 4,312 11.9 11.1 1.9 1.8 7.3 6.7 3.3 14.2

5017 JP Fuji Oil Co 268 2.7 7.0 0.5 0.5 5.4 7.5 1.6 19.1

010950 KS S-Oil Corp 7,989 7.9 7.3 1.3 1.2 7.0 6.2 4.3 17.8

PETD MK Petronas Dagangan 5,258 26.6 25.6 4.5 4.3 14.6 14.1 2.9 16.8

PCOR PM Petron Corp 1,782 14.2 11.2 1.4 1.2 7.5 6.9 0.8 9.7

CAO SP China Aviation Oil Singapore 914 11.1 9.8 1.9 1.7 13.0 12.3 1.8 12.5

BCP TB Bangchak Petroleum 1,385 9.1 7.9 1.3 1.2 4.8 4.0 4.5 14.5

ESSO TB Esso Thailand 1,195 9.8 8.0 2.2 1.8 8.6 7.5 - 26.4

IRPC TB IRPC 3,091 11.1 11.2 1.3 1.2 8.3 8.1 3.6 12.5

PTTGC TB PTT Global Chemical 8,784 13.9 11.7 1.3 1.2 7.9 6.8 4.1 9.5

SPRC TB Star Petroleum Refining 1,547 8.0 8.3 1.4 1.3 5.1 5.4 7.0 18.6

TOP TB Thai Oil 4,177 8.7 10.0 1.4 1.3 5.4 4.9 5.3 17.2

6505 TT Formosa Petrochemical Corp 32,021 16.4 17.3 3.4 3.3 11.0 11.7 4.7 21.0

GAS VN PetroVietnam Gas Joint Stock 5,073 16.1 14.3 2.7 2.5 8.3 7.4 4.8 17.3

Average (simple)* 13.3 12.0 1.9 1.7 8.0 7.5 3.1 15.8

Source: Bloomberg Finance LP, DBS Vickers Note: Closing date is 7 February 2017

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:CS, PY

BUY Last Traded Price ( 8 Feb 2017): Bt34.50 (SET : 1,589.29)

Price Target 12-mth: Bt39.00 (13% upside)

Potential Catalyst: Improving gross refining margins

Where we differ: We are more optimistic on gross refining margins


Price Relative

Forecasts and Valuation FY Dec (Bt m) 2015A 2016F 2017F 2018F

Revenue 151,140 123,569 141,687 151,961 EBITDA 11,542 12,655 13,863 14,474 Pre-tax Profit 4,770 6,476 8,069 8,671 Net Profit 4,151 5,340 6,177 6,630 Net Pft (Pre Ex.) 4,600 5,340 6,177 6,630 Net Pft Gth (Pre-ex) (%) 671.7 16.1 15.7 7.3 EPS (Bt) 3.01 3.88 4.49 4.81 EPS Pre Ex. (Bt) 3.34 3.88 4.49 4.81 EPS Gth Pre Ex (%) 672 16 16 7 Diluted EPS (Bt) 3.01 3.88 4.49 4.81 Net DPS (Bt) 2.00 1.60 1.80 2.00 BV Per Share (Bt) 25.8 27.8 30.6 33.5 PE (X) 11.4 8.9 7.7 7.2 PE Pre Ex. (X) 10.3 8.9 7.7 7.2 P/Cash Flow (X) 3.9 3.1 4.9 4.4 EV/EBITDA (X) 6.0 4.7 4.0 3.5 Net Div Yield (%) 5.8 4.6 5.2 5.8 P/Book Value (X) 1.3 1.2 1.1 1.0 Net Debt/Equity (X) 0.6 0.3 0.2 0.0 ROAE (%) 12.1 14.5 15.4 15.0 Earnings Rev (%): 0 0 0 Consensus EPS (Bt): 3.67 3.95 4.40 Other Broker Recs: B: 11 S: 0 H: 6

Source of all data on this page: Company, DBS Vickers, Bloomberg Finance L.P

Optimism on profit outlook Underperformance was overdone. Bangchak Petroleum Pcl (BCP)’s share price improved 5.2% in early 2017, after a underperforming the market in 2016. We believe market sentiment on the stock should improve this year on better earnings outlook and easing concerns over its E&P business which was a drag on the overall earnings of the company when oil prices were very low. Trading at attractive valuations and offering dividend yields of 5-6% during 2016-18F, we maintain our BUY call with TP at Bt39/share. 4Q16E earnings preview. We expect BCP’s base gross refining margin (GRM) to improve slightly from US$5.6 per barrel (bbl) in 3Q16 to US$6.3/bbl in 4Q16E. Its marketing margin of Bt0.8/litre should also be sustained in 4Q16. We believe the company would continue to operate its refinery at a high utilisation rate of >95%, based on nameplate capacity of 120k barrels per day (bd) to achieve the target crude run of 98kbd for 2016E, down from 113kbd in 2015. Apart from better GRM, net profit is expected to improve q-o-q on inventory gains. BCP’s earnings could be driven by better GRM. Although we expect BCP’s market GRM to ease to more sustainable levels of US$6-7/bbl for 2016E-18F, its earnings outlook should continue to improve, driven by a gradual increase in GRM. Its oil marketing and solar power businesses should continue to generate stable cash flows. These two segments are the key factors to reduce BCP’s earnings volatility in the longer term.

Valuation:

BCP’s valuation is undemanding at 7.7x 2017 PE, compared

with 13x average for regional peers. We also expect the

company to maintain its dividend yield of 5-6% for 2016E-18F.

Our TP of Bt39 comprises Bt28 (based on 1.3x PBV) for the oil-

related businesses and Bt11 (based on DCF) for the solar

business.

Key Risks to Our View:

Volatile oil price is the key risk

Refiners’ earnings are volatile because of inventory gains/losses

following changes in crude oil prices each quarter. BCP

mitigates this volatility by hedging and has a good track

record. BCP has a policy of hedging up to 30% of its output. At A Glance

Issued Capital (m shrs) 1,377

Mkt. Cap (Btm/US$m) 47,504 / 1,356

Major Shareholders (%)

PTT 27.2

Ministry of Finance 10.0

Thai NVDR 4.6

Free Float (%) 62.7

3m Avg. Daily Val (US$m) 3.5

ICB Industry : Oil & Gas / Oil & Gas Producers


9 Feb 2017

Thailand Company Guide

Bangchak Petroleum Pcl Version 5 | Bloomberg: BCP TB | Reuters: BCP.BK Refer to important disclosures at the end of this report

66

86

106

126

146

166

186

206

23.0

28.0

33.0

38.0

43.0

Feb-13 Feb-14 Feb-15 Feb-16 Feb-17

Relative IndexBt

Bangchak Petroleum Pcl (LHS) Relative SET (RHS)

ASIAN INSIGHTS VICKERS SECURITIES

Page 2

Company Guide

Bangchak Petroleum Pcl

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Crude run to be ramped up in 2017. We expect BCP’s crude

run to increase in 2017, up from 98-100kbd in 2016. The

company is able to ramp up the refinery to above its 2000-2014

average of 87kbd (73% utilisation) because of the new crude

distillate unit (CDU), which was installed in 2014 to replace the

one damaged by fire in 2012. The new CDU increases BCP’s

crude distillation capacity by 20kbd to 140kbd. BCP had

optimised its crude run to capture favourable GRMs in 2015 but

its crude run declined in 2016 due to planned maintenance

shutdowns in 1Q16.

GRM should normalise in 2016E-18 after its peak in 2015. GRM

is the critical factor for BCP’s earnings from oil refining business.

We expect its abnormally high GRM in 2015 to ease to more

sustainable levels at US$6-7/bbl in 2016E-18F. There would be

upside from inventory gains in 2016 from higher crude oil prices

in 4Q16. Nonetheless, we expect GRM to be affected by

capacity additions in the region, especially for middle distillate

products.

Oil marketing business will continue to benefit from higher oil

demand in domestic market. BCP’s marketing margins should

be sustainable at Bt0.7/litre, after registering a strong

Bt0.76/litre in 2015, following the sharp decline in oil prices as

well as energy price deregulation and restructuring in Thailand.

The outlook for BCP’s marketing business is solid, given its

strong foothold in the retail oil market (with the second largest

market share after PTT). Stable earnings from the marketing

business will be able to offset volatile profits from the oil

refining segment.

More solar capacity to be added into portfolio. The capacity of

BCP’s solar farms will continue to increase after its subsidiary,

BCPG Plc (BCPG) acquired SunEdison Japan with incremental

capacity of 198MW. Only 13MW is in operation currently, with

another 27MW under construction and coming onstream

during 2016E-18. We assume only 13MW additional capacity in

our earnings forecast. Management is keen on expanding the

total capacity of the renewable power business to 500MW by

2020, including solar farms and a geothermal power plant in

Indonesia. Note that BCPG was listed on the stock market in

Sep 2016.

EBITDA contribution from solar business will gradually increase

from new capacity in Japan. We estimate EBITDA contribution

from the solar business will be steady at Bt3bn p.a. for the next

three years, and account for 21% of group EBITDA in 2016E-

17F. The EBITDA contribution from the solar power business will

gradually increase when new capacity of the business in Japan

comes online from 2016 onwards.

Crude run (kbd)

Base GRM (US$/bbl)

Marketing margin (Bt/litre)

Total capacity - Solar (MW) YE

EBITDA contribution - Solar (Bt, mn)


86.5

113

100105 105

0.0

16.3

32.6

48.9

65.2

81.5

97.8

114.1

2014A 2015A 2016F 2017F 2018F

6.96

9.05

6.216.78 6.92

0.0

1.8

3.7

5.5

7.4

9.2

2014A 2015A 2016F 2017F 2018F

0.710.76

0.7 0.7 0.7

0.00

0.16

0.31

0.47

0.62

0.78

2014A 2015A 2016F 2017F 2018F

118 118

131 131 131

0.0

26.5

52.9

79.4

105.8

132.3

2014A 2015A 2016F 2017F 2018F

2572

30053147

3552

3896

0.0

787.0

1574.1

2361.1

3148.1

3935.2

2014A 2015A 2016F 2017F 2018F


Page 3

Company Guide


Balance Sheet:

Improving financials. BCP’s financial position is expected to

improve gradually, as its D/E ratio drops from 0.9x to 0.6-0.7x

by 2017, driven by steady profit growth – thanks to stable

earnings from the marketing and solar power businesses. Asset

turnover could dip in 2016E, following a 45-day planned

maintenance shutdown to further improve refinery efficiency

under its 3E (Efficiency, Energy and Environment) improvement

programme. The programme will be implemented over the next

3-4 years up to 2020, when its refinery is upgraded to one of

the most complex in Thailand.

Share Price Drivers:

Attractive valuation and yield. BCP is trading at less than 8x PE

based on forecast earnings for the next three years, compared

with >13x for regional peers. And the stock offers good

dividend yields of 5-6% over the same period. This could attract

investors who are looking for beneficiaries of rising oil demand

in the domestic market. BCP’s profit will be less volatile than

that of oil refineries which do not have retail outlets. The stable

cash flow from its solar business could also cushion the impact

of volatile oil prices.

Recurring income from alternative energy business. BCP should

be able to reap the benefit from the expansion of renewable

power business of its subsidiary, BCPG. In addition to its existing

solar power businesses in Thailand and Japan, BCPG has

recently announced the acquisition of a wind power generation

asset in the Philippines. We believe that earnings contribution

from renewable power business would continue to increase its

role in BCP’s profit and cash flow.

Key Risks:

Earnings exposed to crude oil volatility. Refiners’ earnings are

volatile due to inventory gains/losses, following changes in

crude oil prices each quarter. BCP mitigates the volatility by

hedging and has a good track record, booking hedging gains

over the past seven quarters. The company has a policy of

hedging up to 30% of its output. Another risk is impairment

charge at its E&P business if oil prices head on a downward

trend.

Company Background

BCP operates a 120-kbd oil refinery located in Bangkok. Its

refined oil products are distributed via petrol stations under its

retail marketing segment. BCP also invests in alternative

energy, mainly solar and bio fuel.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


1.4

1.6

1.8

2.0

2.2

2.4

0.00

0.20

0.40

0.60

0.80

1.00

2014A 2015A 2016F 2017F 2018F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

8,000.0

2014A 2015A 2016F 2017F 2018F

Capital Expenditure (-)

Btm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2014A 2015A 2016F 2017F 2018F

Avg: 15.2x

+1sd: 26.4x

+2sd: 37.6x

-1sd: 4x

-6.4

3.6

13.6

23.6

33.6

43.6

53.6

63.6


(x)

Avg: 1.3x

+1sd: 1.42x

+2sd: 1.55x

-1sd: 1.17x

-2sd: 1.04x

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9


(x)


Page 4

Company Guide


Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F

Crude run (kbd) 86.5 113 100 105 105 Base GRM (US$/bbl) 6.96 9.05 6.21 6.78 6.92 Marketing margin (Bt/litre) 0.71 0.76 0.70 0.70 0.70 Total capacity - Solar (MW) YE 118 118 131 131 131 EBITDA contribution - Solar (Bt, mn) 2,572 3,005 3,147 3,552 3,896

Income Statement (Btm) FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 183,016 151,140 123,569 141,687 151,961

Cost of Goods Sold (178,473) (139,686) (111,856) (128,686) (138,013)

Gross Profit 4,543 11,454 11,713 13,001 13,948

Other Opng (Exp)/Inc (4,480) (5,175) (4,448) (4,676) (5,167)

Operating Profit 63.1 6,279 7,265 8,325 8,781

Other Non Opg (Exp)/Inc 1,197 543 532 586 678

Associates & JV Inc 5.15 12.4 12.7 12.9 13.2

Net Interest (Exp)/Inc (1,427) (1,615) (1,333) (855) (801)

Exceptional Gain/(Loss) 99.8 (449) 0.0 0.0 0.0

Pre-tax Profit (61.5) 4,770 6,476 8,069 8,671

Tax 691 (673) (940) (1,171) (1,259)

Minority Interest 66.9 53.4 (197) (721) (782)

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net Profit 696 4,151 5,340 6,177 6,630

Net Profit before Except. 596 4,600 5,340 6,177 6,630

EBITDA 4,579 11,542 12,655 13,863 14,474

Growth

Revenue Gth (%) (1.9) (17.4) (18.2) 14.7 7.3

EBITDA Gth (%) (52.2) 152.1 9.6 9.5 4.4

Opg Profit Gth (%) (98.7) 9,854.4 15.7 14.6 5.5

Net Profit Gth (Pre-ex) (%) (87.1) 671.7 16.1 15.7 7.3

Margins & Ratio

Gross Margins (%) 2.5 7.6 9.5 9.2 9.2

Opg Profit Margin (%) 0.0 4.2 5.9 5.9 5.8

Net Profit Margin (%) 0.4 2.7 4.3 4.4 4.4

ROAE (%) 2.0 12.1 14.5 15.4 15.0

ROA (%) 0.9 5.2 6.4 7.0 7.1

ROCE (%) (1.3) 4.3 5.5 7.0 7.3

Div Payout Ratio (%) 197.9 66.3 41.3 40.1 41.5

Net Interest Cover (x) 0.0 3.9 5.4 9.7 11.0



Page 5

Company Guide


Quarterly / Interim Income Statement (Btm)

FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Revenue 35,203 35,136 30,276 37,262 36,686


Gross Profit 2,085 2,039 949 4,276 2,912

Other Oper. (Exp)/Inc (1,133) (1,672) (1,212) (1,433) (1,473)

Operating Profit 952 367 (264) 2,843 1,439

Other Non Opg (Exp)/Inc 201 98.8 126 111 113

Associates & JV Inc (1.8) 3.71 12.6 (5.8) (1.3)

Net Interest (Exp)/Inc (391) (412) (373) (327) (369)

Exceptional Gain/(Loss) (332) (266) 305 252 183

Pre-tax Profit 429 (208) (193) 2,874 1,365

Tax (5.6) 17.2 167 (459) (233)

Minority Interest 8.72 78.6 72.0 2.50 46.6

Net Profit 432 (112) 46.6 2,417 1,178

Net profit bef Except. 764 154 (259) 2,165 995

EBITDA 2,356 1,689 973 3,967 2,891

Growth

Revenue Gth (%) (14.9) (0.2) (13.8) 23.1 (1.5)

EBITDA Gth (%) (53.1) (28.3) (42.3) 307.5 (27.1)

Opg Profit Gth (%) (73.9) (61.4) nm nm (49.4)

Net Profit Gth (Pre-ex) (%) (72.5) (79.9) nm nm (54.0)

Margins

Gross Margins (%) 5.9 5.8 3.1 11.5 7.9

Opg Profit Margins (%) 2.7 1.0 (0.9) 7.6 3.9

Net Profit Margins (%) 1.2 (0.3) 0.2 6.5 3.2

Balance Sheet (Btm)

FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 38,136 40,044 38,626 36,951 34,167

Invts in Associates & JVs 762 774 783 792 801

Other LT Assets 5,773 7,324 7,338 7,352 7,366

Cash & ST Invts 8,577 12,390 20,776 24,568 30,364

Inventory 14,059 13,945 11,393 13,224 14,237

Debtors 5,835 5,234 5,078 5,823 6,245

Other Current Assets 3,824 2,230 2,235 2,239 2,244

Total Assets 76,966 81,942 86,229 90,950 95,424

ST Debt

1,312 1,026 1,026 1,000 1,000

Creditor 5,774 4,994 7,329 8,476 9,110

Other Current Liab 4,223 4,468 4,468 4,468 4,468

LT Debt 28,886 32,632 31,606 30,606 29,606

Other LT Liabilities 2,804 2,838 2,841 2,844 2,847

Shareholder’s Equity 33,309 35,481 38,259 42,137 46,191

Minority Interests 657 502 699 1,420 2,202

Total Cap. & Liab. 76,966 81,942 86,229 90,950 95,424

Non-Cash Wkg. Capital 13,720 11,947 6,908 8,342 9,147

Net Cash/(Debt) (21,621) (21,268) (11,856) (7,038) (241)

Debtors Turn (avg days) 14.5 13.4 15.2 14.0 14.5

Creditors Turn (avg days) 18.0 14.6 21.0 23.3 24.1

Inventory Turn (avg days) 32.5 37.9 43.2 36.3 37.7

Asset Turnover (x) 2.4 1.9 1.5 1.6 1.6

Current Ratio (x) 2.9 3.2 3.1 3.3 3.6

Quick Ratio (x) 1.3 1.7 2.0 2.2 2.5

Net Debt/Equity (X) 0.6 0.6 0.3 0.2 0.0

Net Debt/Equity ex MI (X) 0.6 0.6 0.3 0.2 0.0

Capex to Debt (%) 24.3 13.8 10.5 10.3 7.2

Z-Score (X) 3.8 3.4 3.1 3.3 3.5



Page 6

Company Guide


Cash Flow Statement (Btm)

FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit (61.5) 4,770 6,476 8,069 8,671

Dep. & Amort. 3,313 4,708 4,846 4,939 5,002

Tax Paid 691 (673) (940) (1,171) (1,259)

Assoc. & JV Inc/(loss) (5.2) (12.4) (12.7) (12.9) (13.2)

Chg in Wkg.Cap. 157 1,773 5,039 (1,434) (805)

Other Operating CF 2,027 1,586 (195) (719) (780)

Net Operating CF 6,121 12,153 15,213 9,670 10,816

Capital Exp.(net) (7,350) (4,645) (3,428) (3,264) (2,218)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV (5.2) (12.4) (8.9) (9.0) (9.2)

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF (2,687) (6,686) 0.0 0.0 0.0

Net Investing CF (10,042) (11,343) (3,437) (3,273) (2,227)

Div Paid (1,946) (2,039) (2,561) (2,299) (2,575)

Chg in Gross Debt 9,369 3,460 (1,026) (1,026) (1,000)

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF (2,075) (2,313) 197 721 782

Net Financing CF 5,348 (893) (3,391) (2,605) (2,793)

Currency Adjustments 0.0 0.0 0.0 0.0 0.0

Chg in Cash 1,427 (82.4) 8,385 3,792 5,796

Opg CFPS (Bt) 4.33 7.54 7.39 8.06 8.44

Free CFPS (Bt) (0.9) 5.45 8.56 4.65 6.24


Target Price & Ratings History

Source: DBS Vickers

Analyst: Chaipat THANAWATTANO

THAI-CAC Certified

Corporate Governance CG Rating 2016

THAI-CAC is Companies participating in Thailand's Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) under Thai Institute of Directors (as of October 28, 2016) are categorised into:

Score Description

Declared Companies that have declared their intention to join CAC

Certified Companies certified by CAC.

Corporate Governance CG Rating is based on Thai Institute of

Directors (IOD)’s annual assessment of corporate governance practices of listed companies. The assessment covers 235 criteria in five categories including board responsibilities (35% weighting), disclosure and transparency (20%), role of stakeholders (20%), equitable treatment of shareholders (10%) and rights of shareholders (15%). The IOD then assigns numbers of logos to each company based on their scoring as follows:

Score Range Number of Logo Description

90-100 Excellent

80-89 Very Good

70-79 Good

60-69 Satisfactory

50-59 Pass

<50 No logo given N/A

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 24 Feb 16 30.25 39.00 BUY

2: 07 Apr 16 29.75 39.00 BUY

3: 20 Apr 16 30.75 39.00 BUY

4: 26 Apr 16 31.00 39.00 BUY

5: 03 May 16 30.50 39.00 BUY

6: 13 May 16 30.00 39.00 BUY

7: 19 May 16 30.00 39.00 BUY

8: 27 Jun 16 30.25 39.00 BUY

9: 08 Jul 16 33.75 39.00 BUY

10: 01 Aug 16 34.00 39.00 BUY

11: 09 Aug 16 35.75 39.00 BUY

12: 19 Sep 16 31.50 39.00 BUY

13: 29 Sep 16 31.00 39.00 BUY

14: 12 Oct 16 29.25 39.00 BUY

Note : Share price and Target price are adjusted for corporate actions. 15: 31 Oct 16 30.25 39.00 BUY

16: 10 Nov 16 32.50 39.00 BUY

17: 01 Dec 16 33.25 39.00 BUY

1

23

4

5

6

7

8

9

10

11

12

131415

16

17

27.07

29.07

31.07

33.07

35.07

37.07

Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17

Bt

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:CS, PY

BUY (Upgrade from HOLD)

Last Traded Price ( 8 Feb 2017): Bt5.25 (SET : 1,589.29)

Price Target 12-mth: Bt6.00 (14% upside) (Prev Bt5.30)

Potential Catalyst: Better operation of UHV unit

Where we differ: We are more cautious on product spreads


Price Relative


Revenue 214,172 172,444 209,599 217,465 EBITDA 15,803 18,958 18,423 18,994 Pre-tax Profit 11,769 10,381 11,422 12,147 Net Profit 9,402 9,795 9,680 10,297 Net Pft (Pre Ex.) 7,010 11,395 9,680 10,297 Net Pft Gth (Pre-ex) (%) nm 62.6 (15.0) 6.4 EPS (Bt) 0.46 0.48 0.47 0.50 EPS Pre Ex. (Bt) 0.34 0.56 0.47 0.50 EPS Gth Pre Ex (%) nm 63 (15) 6 Diluted EPS (Bt) 0.46 0.48 0.47 0.50 Net DPS (Bt) 0.22 0.19 0.19 0.20 BV Per Share (Bt) 3.71 3.98 4.27 4.58 PE (X) 11.4 11.0 11.1 10.4 PE Pre Ex. (X) 15.3 9.4 11.1 10.4 P/Cash Flow (X) 3.9 10.1 6.6 6.7 EV/EBITDA (X) 10.0 8.3 8.1 7.3 Net Div Yield (%) 4.2 3.6 3.6 3.8 P/Book Value (X) 1.4 1.3 1.2 1.1 Net Debt/Equity (X) 0.7 0.6 0.5 0.3 ROAE (%) 13.1 12.5 11.5 11.4 Earnings Rev (%): 0 0 0 Consensus EPS (Bt): 0.50 0.52 0.57 Other Broker Recs: B: 16 S: 1 H: 5


Upgrading to BUY Upgrade rating to BUY on higher TP. IRPC PCL (IRPC)’s share price outperformed the market in early 2017, up 10.4% year-to-date. We believe this reflects better investor sentiment on the operation of the new product upgrading unit under the Upstream Project for Hygiene and Value Added Product (UHV project). We raised our TP by 13% to Bt6.00 by assigning a higher P/BV multiple to reflect the recovery in oil prices. We also upgrade our rating on the stock from HOLD to BUY.

4Q16E earnings. estimate. IRPC’s 4Q16E earnings is likely to have improved further q-o-q due to higher gross refining margins (GRM), driven by wider cracker spreads of fuel oil and gasoline. Meanwhile, product spreads of the petrochemical segment were weaker q-o-q, mainly for Propylene and Polypropylene (PP) where spreads declined by 19% and 9% q-o-q, respectively. We estimate that 4Q16E profit would also be supported by an inventory gain of c.Bt530m from higher oil prices. Utilisation rate is likely to remain unchanged from 3Q16 as the operation of the UHV unit only commenced in 2Q16.

UHV project should support margins in 2017F. While GRMs are likely to improve in 2017F although still below the abnormally high levels in 2015, we believe the UHV project will be a key pillar to hold up IRPC’s overall margin in 2017. However, the potential benefit from the UHV project to IRPC’s gross integrated margin (GIM) for 2017F could be slightly better, raising it by US$1.5-2 per barrel (bbl) to US$12.9, due to higher utilisation rate as production ramp-up of the unit is improving.

Valuation:

We apply a higher P/BV multiple to derive a new TP of Bt6/sh

for IRPC. The P/BV is raised from 1.3x to 1.4x to reflect the

average trading multiple during the last oil price recovery. This

offers capital gains of 14% to investors from the current price

and the dividend yield of nearly 4% for 2016-17F is still

attractive.


Volatile oil price is key to its earnings performance via

inventory gains or losses. Further, new capacity in the region

may continue to pressure GIMs this year, as the bulk of new

capacity will be in the Middle East, China and India, especially

for diesel. Another risk is the slower-than-expected ramp-up of

the UHV project’s operation. At A Glance Issued Capital (m shrs) 20,434

Mkt. Cap (Btm/US$m) 107,281 / 3,063


PTT Pcl 38.5

Government Savings Bank 9.5

Government Pension Fund 4.9

Free Float (%) 46.9


ICB Industry : Basic Materials / Chemicals


9 Feb 2017


IRPC PCL Version 5 | Bloomberg: IRPC TB | Reuters: IRPC.BK Refer to important disclosures at the end of this report

60

80

100

120

140

160

180

200

220

2.6

3.1

3.6

4.1

4.6

5.1

5.6


Relative IndexBt

IRPC PCL (LHS) Relative SET (RHS)


Page 2

Company Guide

IRPC PCL


Earnings Drivers:

Upgrading the unit could drive crude run higher. IRPC’s crude

run during the last five years hovered in a range of 160-176k

barrels per day (74-82% utilisation) as the company had to

optimise its operating rate to minimise fuel oil output. We

estimate the crude run could soften slightly from 183k barrels

per day in 2015 to 181k in 2016E due to its plant optimisation

strategy for the refinery. The refinery shutdown was postponed

to 2017 as the ramp-up of the UHV project was slower than

expected. We expect the UHV project will enable the company

to raise its crude run further to 194-196k barrels per day (95%

utilisation) in 2018F, as IRPC’s fuel oil output could be upgraded

to propylene with better margins. Its fuel oil output would then

drop from >40% of total production to only 8%.

Market GIM in 2016F could soften y-o-y. We estimate IRPC’s

gross integrated margin (GIM) to soften from US$14/barrel (bbl)

in 2015 to a more sustainable level of US$12.5/bbl in 2016 and

gradually improve in 2017-18F. This will be driven by favourable

gross refining margins (GRM)s from the oil refining segment as

a result of high demand for gasoline. Also behind the higher

GRM was the lower negative crack spread of fuel oil, which is

one of IRPC’s key products (23% of total products).

Operating expense is expected to be stable. We assume IRPC to

maintain its operating expense (opex) at US$5.7/bbl during

2016E-18F, unchanged from 2015. We believe opex would

improve further under the Delta Project, initiated by the

company’s goal to manage operating cost. We believe there

remains upside potential to earnings from the cost side in 2016-

17F, when the UHV project comes online.

Capex should have peaked. IRPC’s investment should have

peaked in 2014 when it had to inject funds into the UHV

project. The investment capex should continue to have decline

in 2017, but the bulk will still come from the UHV project and a

new 240MW-power plant which will supply electricity and

steam to the UHV project. We believe this will be financed by

cash flows generated from operations and more debt.

Higher oil price could raise operating cost. IRPC’s refinery

business should be impacted by the increase in crude oil prices

in the medium term, in our view, via more expensive feedstock

and energy costs, and larger working capital requirements. The

integrated production process of its refinery and petrochemical

complex usually requires the amount of fuel used and lost in the

refining process to be 6% of crude intake, which is higher than

its refinery peers (3-4%). Excluding the impact of inventory

gains, we estimate that IRPC’s profit could be affected by

c.1.8% for every US$1/bbl increase in oil prices.

Crude run (kbd)

Market GIM (US$/bbl)

OPEX (US$/bbl)

Capex (Bt m)

Dubai oil price (US$/bbl)


172183 181

194 196

0.0

28.2

56.5

84.7

112.9

141.1

169.4

197.6

2014A 2015A 2016F 2017F 2018F

7.71

14

12.5 12.9 12.6

0.0

2.9

5.7

8.6

11.4

14.3

2014A 2015A 2016F 2017F 2018F

5.27

5.72 5.72 5.72 5.72

0.00

1.17

2.33

3.50

4.67

5.83

2014A 2015A 2016F 2017F 2018F

22104

17219

6072

4190

1246

0.0

4465.0

8930.0

13395.0

17860.1

22325.1

2014A 2015A 2016F 2017F 2018F

96.6

51.2

42

5257

0.0

19.5

39.0

58.5

78.0

97.5

2014A 2015A 2016F 2017F 2018F


Page 3

Company Guide

IRPC PCL

Balance Sheet:

IRPC’s financial position is the weakest among oil refiners under

the PTT group due to the continuous investments made to

improve operating efficiency. Nonetheless, we expect its D/E

ratio to decline gradually from 2016E onwards, as the UHV

project came onstream in 3Q16. There remains an investment

of US$90m to be made to expand the capacity of its

polypropylene (PP) plant by 34% to 635ktpa, which will be

financed by internal cash flows.


Margin improvement from UHV project. We believe the market

has been optimistic on potential benefits from the UHV project

which will improve its GIM by US$1.5-2/bbl, based on 6-month

average product prices. This could be a near-term share price

catalyst if the project commences operations on schedule and

improves IRPC’s margins.

Key Risks:

Lower-than-expected oil prices could be a headwind for

earnings performance in 2017, as this could lead to stock

losses. Also, new capacity in the region will continue to

pressure GRMs this year, as the bulk of new capacity will be in

the Middle East, China and India, especially for diesel. Another

risk is the slower-than-expected ramp-up of the operation of

the UHV project.

Company Background

IRPC is a fully-integrated refinery and naphtha-based

petrochemical producer. Its refinery is the second largest in

Thailand with a capacity of 215kbd. The refinery and

petrochemical complex have been upgraded to improve

efficiency and product yield. The upgrade was completed in

2Q16 under UHV project, which enables the company to fully

run the refinery, compared with an utilisation rate of 85-87%

currently.


Capital Expenditure

ROE (%)

PB Band (x)


1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

2014A 2015A 2016F 2017F 2018F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

5,000.0

10,000.0

15,000.0

20,000.0

25,000.0

2014A 2015A 2016F 2017F 2018F

Capital Expenditure (-)

Btm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2014A 2015A 2016F 2017F 2018F

Avg: 1.1x

+1sd: 1.25x

+2sd: 1.4x

-1sd: 0.94x

-2sd: 0.79x

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6


(x)


Page 4

Company Guide

IRPC PCL

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F

Crude run (kbd) 172 183 181 194 196

Market GIM (US$/bbl) 7.71 14.0 12.5 12.9 12.6

OPEX (US$/bbl) 5.27 5.72 5.72 5.72 5.72

Capex (Bt m) 22,104 17,219 6,072 4,190 1,246

Dubai oil price (US$/bbl) 96.6 51.2 42.0 52.0 57.0

Income Statement (Btm)

FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 281,589 214,172 172,444 209,599 217,465


Gross Profit (6,341) 16,258 17,591 18,036 18,789


Operating Profit (11,785) 10,086 12,622 11,995 12,522

Other Non Opg (Exp)/Inc 604 444 448 457 467

Associates & JV Inc (139) (184) (49.0) (50.0) (50.0)

Net Interest (Exp)/Inc (1,454) (969) (1,040) (981) (791)

Exceptional Gain/(Loss) 5,163 2,392 (1,600) 0.0 0.0

Pre-tax Profit (7,611) 11,769 10,381 11,422 12,147

Tax 2,398 (2,346) (565) (1,721) (1,830)

Minority Interest (21.2) (21.4) (21.0) (21.0) (21.0)


Net Profit (5,235) 9,402 9,795 9,680 10,297

Net Profit before Except. (10,397) 7,010 11,395 9,680 10,297

EBITDA (6,110) 15,803 18,958 18,423 18,994

Growth

Revenue Gth (%) (3.8) (23.9) (19.5) 21.5 3.8

EBITDA Gth (%) nm nm 20.0 (2.8) 3.1

Opg Profit Gth (%) (1,873.5) nm 25.1 (5.0) 4.4

Net Profit Gth (Pre-ex) (%) (488.5) nm 62.6 (15.0) 6.4

Margins & Ratio

Gross Margins (%) (2.3) 7.6 10.2 8.6 8.6

Opg Profit Margin (%) (4.2) 4.7 7.3 5.7 5.8

Net Profit Margin (%) (1.9) 4.4 5.7 4.6 4.7

ROAE (%) (7.3) 13.1 12.5 11.5 11.4

ROA (%) (3.2) 5.8 6.1 6.0 6.3

ROCE (%) (9.3) 4.6 7.7 6.4 7.0

Div Payout Ratio (%) N/A 47.8 39.6 40.1 39.7

Net Interest Cover (x) (8.1) 10.4 12.1 12.2 15.8



Page 5

Company Guide

IRPC PCL


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Revenue 52,070 49,024 42,575 45,057 45,673


Gross Profit 2,731 2,992 4,574 6,940 3,473


Operating Profit 1,370 1,212 3,193 5,377 1,879

Other Non Opg (Exp)/Inc 121 98.0 89.0 108 114

Associates & JV Inc (46.6) (29.5) (33.9) 24.6 31.9


Exceptional Gain/(Loss) (108) (584) (538) (729) (397)

Pre-tax Profit 1,101 482 2,487 4,562 1,126

Tax (210) (30.6) 537 (847) 189

Minority Interest (4.2) (4.5) (9.3) (9.1) (8.3)

Net Profit 887 447 3,014 3,706 1,307

Net profit bef Except. 996 1,031 3,553 4,435 1,704

EBITDA 2,832 2,673 4,616 6,890 3,727

Growth

Revenue Gth (%) (12.1) (5.9) (13.2) 5.8 1.4

EBITDA Gth (%) (58.0) (5.6) 72.7 49.3 (45.9)

Opg Profit Gth (%) (74.0) (11.5) 163.4 68.4 (65.1)

Net Profit Gth (Pre-ex) (%) (75.3) 3.5 244.7 24.8 (61.6)

Margins

Gross Margins (%) 5.2 6.1 10.7 15.4 7.6

Opg Profit Margins (%) 2.6 2.5 7.5 11.9 4.1

Net Profit Margins (%) 1.7 0.9 7.1 8.2 2.9

Balance Sheet (Btm)

FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 100,872 114,807 114,942 113,111 108,302

Invts in Associates & JVs 6,144 6,117 6,117 6,117 6,117

Other LT Assets 11,640 6,266 6,266 6,266 6,266

Cash & ST Invts 2,009 3,576 4,677 4,313 9,088

Inventory 25,344 21,306 16,320 20,333 21,109

Debtors 11,192 8,942 9,449 11,485 11,916


Total Assets 162,798 163,174 159,930 163,785 164,957

ST Debt

16,548 4,469 13,723 11,237 8,141

Creditor 25,815 25,741 16,320 22,875 23,748


LT Debt 44,243 49,235 40,716 34,683 31,747



Minority Interests 70.2 73.5 94.5 116 137

Total Cap. & Liab. 162,798 163,174 159,930 163,785 164,957

Non-Cash Wkg. Capital 11,852 668 5,793 5,287 5,621

Net Cash/(Debt) (58,782) (50,128) (49,762) (41,607) (30,799)




Asset Turnover (x) 1.7 1.3 1.1 1.3 1.3

Current Ratio (x) 0.9 1.0 0.9 1.0 1.2

Quick Ratio (x) 0.3 0.3 0.4 0.4 0.6

Net Debt/Equity (X) 0.9 0.7 0.6 0.5 0.3


Capex to Debt (%) 36.4 32.1 11.2 9.1 3.1

Z-Score (X) 2.2 2.4 2.3 2.6 2.8



Page 6

Company Guide

IRPC PCL


FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit (7,611) 11,769 10,381 11,422 12,147

Dep. & Amort. 5,210 5,456 5,937 6,021 6,056

Tax Paid 2,398 (2,346) (565) (1,721) 0.0

Assoc. & JV Inc/(loss) 139 184 49.0 50.0 50.0

Chg in Wkg.Cap. 6,413 11,184 (5,126) 506 (334)

Other Operating CF (1,952) 1,592 (70.0) (71.0) (1,901)

Net Operating CF 4,596 27,840 10,606 16,207 16,018

Capital Exp.(net) (22,104) (17,219) (6,072) (4,190) (1,246)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV (139) 27.7 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF 1,203 5,920 0.0 0.0 0.0

Net Investing CF (21,040) (11,271) (6,072) (4,190) (1,246)

Div Paid (2,041) (1,633) (4,189) (3,883) (3,985)

Chg in Gross Debt 17,761 (7,087) 735 (8,519) (6,033)

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF (2,391) (6,282) 21.0 21.0 21.0

Net Financing CF 13,328 (15,001) (3,433) (12,381) (9,997)


Chg in Cash (3,116) 1,567 1,101 (364) 4,775

Opg CFPS (Bt) (0.1) 0.82 0.77 0.77 0.80

Free CFPS (Bt) (0.9) 0.52 0.22 0.59 0.72



Source: DBS Vickers


THAI-CAC Certified



Score Description






90-100 Excellent

80-89 Very Good

70-79 Good

60-69 Satisfactory

50-59 Pass


S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 10 Feb 16 4.30 4.30 HOLD

2: 22 Feb 16 4.28 4.30 HOLD

3: 07 Mar 16 4.88 4.30 HOLD

4: 07 Apr 16 4.98 4.30 HOLD

5: 19 Apr 16 5.25 4.30 HOLD

6: 20 Apr 16 5.20 4.30 HOLD

7: 03 May 16 5.05 4.30 HOLD

8: 09 May 16 4.84 4.30 HOLD

9: 08 Jul 16 4.88 5.20 HOLD

10: 20 Jul 16 4.90 5.20 HOLD

11: 04 Aug 16 4.94 5.20 HOLD

12: 12 Oct 16 4.76 5.20 HOLD

13: 18 Oct 16 4.82 5.20 HOLD

14: 03 Nov 16 4.84 5.30 HOLD

Note : Share price and Target price are adjusted for corporate actions. 15: 16 Nov 16 4.72 5.30 HOLD

16: 01 Dec 16 4.84 5.30 HOLD

1

2

3

4 5

6

78

9

10

1112

13

14

15

16

3.97

4.17

4.37

4.57

4.77

4.97

5.17

5.37

5.57

Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17

Bt

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:CS, PY

BUY Last Traded Price ( 8 Feb 2017): Bt70.25 (SET : 1,589.29)


Potential Catalyst: Positive momentum for earnings in 4Q16-2017

Where we differ: We are more cautious on product spread in 2017 Analyst Chaipat THANAWATTANO +66 2657 7827 [email protected]

Price Relative


Revenue 403,440 346,827 390,164 405,903 EBITDA 45,339 45,853 51,136 55,635 Pre-tax Profit 22,765 24,566 29,809 34,405 Net Profit 20,503 22,371 26,604 30,732 Net Pft (Pre Ex.) 22,727 22,371 26,604 30,732 Net Pft Gth (Pre-ex) (%) 54.1 (1.6) 18.9 15.5 EPS (Bt) 4.55 4.96 5.90 6.82 EPS Pre Ex. (Bt) 5.04 4.96 5.90 6.82 EPS Gth Pre Ex (%) 54 (2) 19 16 Diluted EPS (Bt) 4.55 4.96 5.90 6.82 Net DPS (Bt) 2.80 2.80 2.80 3.10 BV Per Share (Bt) 51.4 53.5 56.6 60.5 PE (X) 15.4 14.2 11.9 10.3 PE Pre Ex. (X) 13.9 14.2 11.9 10.3 P/Cash Flow (X) 6.3 8.9 7.7 6.4 EV/EBITDA (X) 8.3 8.1 7.0 6.1 Net Div Yield (%) 4.0 4.0 4.0 4.4 P/Book Value (X) 1.4 1.3 1.2 1.2 Net Debt/Equity (X) 0.2 0.2 0.2 0.1 ROAE (%) 9.0 9.5 10.7 11.6 Earnings Rev (%): 0 0 0 Consensus EPS (Bt): 5.06 6.08 6.56 Other Broker Recs: B: 25 S: 0 H: 2


Strong profit momentum to continue Maintain BUY with new TP of Bt79. PTTGC’s share price performed quite well in 2016, which has continued in early 2017. We believe this reflects its positive earnings momentum in 4Q16 and 2017F given the strong oil and olefins product prices. We maintain our BUY rating on the stock with its TP being raised to Bt79/sh – pegged to a higher PBV multiple amid the oil price recovery. The current share price still offers 12% upside potential and 16% total returns (including dividends).

4Q16E performance expectation. PTTGC is expected to report stronger profit in 4Q16E, which could reach Bt7.5bn or the highest quarterly number for 2016. The key drivers are better product margins and inventory gains. We expect the company to maintain a high utilisation rate for its refinery at c.100% in 4Q16. The operation at its ethylene crackers should also be maximised to reap benefits from the planned shutdowns of other producers in Thailand and strong demand.

New investments are key drivers for future growth. Its long-term earnings outlook relies heavily on its new investments, which are still in the feasibility study stage, especially for financial returns. We expect two projects – i.e. the Map Tha Put Retrofit Project that enables the company to upgrade internal naphtha feedstock to downstream, and the Propylene Oxide and Polyol plants in Thailand – to be finalised shortly. It should be able to fund these projects using its cash pile and strong cashflow. Valuation:

We apply a higher P/BV multiple to derive our new TP of Bt79

for PTTGC, Our TP is now pegged to 1.4x PBV for 2017F, vs

1.3x previously, to reflect the average trading multiple during

the last oil price recovery. PTTGC is among the cheapest

petrochemical plays in the region at 11.7x 2017F PE, compared

with the peer average of 14x PE. The higher oil price will

increase its cost competitiveness in the ethylene and derivatives

business, compared with naphtha-based olefins crackers in the

region.


Weaker oil and petrochemical prices. PTTGC’s refinery business

could be impacted by more stock losses if oil prices weaken

from the current level, though we see limited downside. This

will also depress petrochemical prices and product spreads.

At A Glance Issued Capital (m shrs) 4,461

Mkt. Cap (Btm/US$m) 313,371 / 8,948


PTT Pcl 48.9

Thai NVDR 8.0

State Street Bank Europe Limited 3.0

Free Float (%) 51.1




9 Feb 2017


PTT Global Chemical Version 5 | Bloomberg: PTTGC TB | Reuters: PTTGC.BK Refer to important disclosures at the end of this report


Page 2

Company Guide

PTT Global Chemical


Earnings Drivers:

Operating rate to improve from better gas flow. Smoother gas

flow from PTT should be positive for PTTGC’s operation of its

ethane-based crackers. Hence, we expect the average utilisation

rate of PTTGC’s major business segments, i.e. oil refinery,

aromatics and olefins, to gradually increase. Among these three

segments, oil refinery will run at full capacity while an increase

in utilisation will be driven by olefins and aromatic plants.

Stable market GRM expected. We assume stable market gross

refining margins (GRM) for PTTGC over 2016-18 at US$5.2-

5.5/bbl on a more balanced demand/supply outlook for regional

oil refineries in Asia. We believe the global economic recovery

could bolster the regional demand for refined oil products.

Downside risk is posed by a massive supply of middle distillates

(mainly diesel and jet fuel) as new refineries in the region shift

towards these products. In addition, higher demand for gasoline

has prompted refiners to increase their operating rates to gain

more gasoline output, which will also lead to ample supply of

middle distillates in the near term.

EBITDA margin for olefins could be steady. We think that the

olefins chain, mainly ethylene, would be the best place in the

petrochemical space due to better demand/supply balance. We

expect PTTGC’s EBITDA margin for this segment to be sustained

at 23-24% over the next three years. The next wave of new

capacity for ethylene cracker could be expected after 2017F,

when capacity additions from low cost shale gas in the US enter

the market.

Abundant PX supply should keep spreads at bay. We assume PX

condensate spread to be within the range of US$350-370/t for

the next three years to reflect abundant supply in the market.

This is driven by new capacity which needs more time to be

absorbed given the economic slowdown in China. Nonetheless,

an upside to PX spreads would be lower condensate cost, which

is normally linked to crude oil prices.

Olefin business contributes more than half of operating profit.

The olefin segment will remain in the driver’s seat in 2016F, as

product prices and spreads should remain healthy due to more

balanced demand-supply in the market. Also, we expect the gas

price adjustment in 2016 to favour PTTGC, based on the

netback formula for feedstock supplied by PTT. The recovery of

oil prices could be another boost for product price and spread in

2017F as well as potential inventory gain for its oil refining

segment. Note that its product spread for olefins segment

based on netback formula with feedstock provider, i.e. PTT, is

usually wider when oil prices are increasing.

Average utilization (%)

Market GRM (US$/bbl)

EBITDA margin - Olefins (%)

PX-condensate spread (US$/t)

Adjusted EBITDA breakdown


Refinery14%

Aromatics11%

Olefins & Derivatives

65%

Others10%


Page 3

Company Guide

PTT Global Chemical

Balance Sheet:

Improving financial health. Without new investments in the near

term, we expect PTTGC’s financial position to improve, which

makes room for new investment opportunities. The company is

finalising its investment plans for the next five years, which

includes a 1mtpa ethane-based cracker in the US and the

expansion of its naphtha cracker in the current location in

Rayong, under the “Map Tha Put Retrofit” (MTPR) project. The

construction of these projects is expected to start in 2018 with

commercial operations in 2020-21.


Higher oil and petrochemical prices. The recent increase in oil

prices could be positive for PTTGC’s earnings via higher product

prices and inventory gains. The correlation between PTTGC

share price and oil price during the past six months was 85%.

Balancing feedstock to reduce reliance on gas. One of the major

concerns on PTTGC’s outlook is depleting gas feedstock in the

Gulf of Thailand. This has prompted the group to adjust

production to reduce reliance on gas feedstock. PTTGC is trying

to increase the share of naphtha feedstock from below 10%

currently to c.30% by utilising 1.5mtpa of naphtha output from

its refinery and aromatics plants to produce 761ktpa of olefin

products under MTPR project. This will reduce the impact of

volatile oil prices and depleting gas resources in Thailand.

Key Risks:

Lower-than-expected oil and petrochemical product prices. The

impact of inventory loss on PTTGC’s earnings is less severe

than Thai Oil (TOP TB) because of lower earnings contribution

from refinery at c.20% of total EBITDA, vs. 73% from the

petrochemical business. Also, a decline in oil prices will also

lead to lower petrochemical product prices, which is the key

parameter in calculating the profit sharing with gas supplier,

PTT, based on a netback formula.

Long-term risk: Depleting gas reserves. Over 90% of PTTGC's

olefin feedstock is gas. The unplanned or planned shutdown of

gas separation plants could reduce gas supply and hurt

PTTGC's earnings. Thailand has only six years of gas reserves,

which could pose a risk to PTTGC in the long term.

Nonetheless, PTTGC has planned to leverage its expertise in

gas-based ethylene cracker in the new market, the US, to

capture the competitive feedstock cost from shale gas.

Company Background

PTT Global Chemical (PTTGC) is Thailand's largest ethane-

based petrochemical producer. The company is the core

petrochemical arm under PTT Group. PTTGC was formed after

the amalgamation of two petrochemical companies: PTT

Chemical and PTT Aromatics and Refining in 2012.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Page 4

Company Guide

PTT Global Chemical

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F

Average utilization (%) 91.3 89.3 84.4 91.7 91.7

Market GRM (US$/bbl) 4.41 5.45 5.24 5.51 5.51

EBITDA margin - Olefins (%) 26.0 24.0 23.0 23.0 24.0 PX-condensate spread (US$/t) 400 382 350 370 370


FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 554,695 403,440 346,827 390,164 405,903


Gross Profit 28,627 37,272 36,931 41,406 46,055



Other Non Opg (Exp)/Inc 1,494 2,395 2,400 2,400 2,400

Associates & JV Inc 177 711 711 711 711

Net Interest (Exp)/Inc (4,452) (3,966) (3,452) (3,103) (2,684)

Exceptional Gain/(Loss) 628 (2,224) 0.0 0.0 0.0

Pre-tax Profit 14,673 22,765 24,566 29,809 34,405

Tax (581) (1,984) (1,908) (2,910) (3,369)

Minority Interest 1,280 (278) (287) (295) (304)


Net Profit 15,372 20,503 22,371 26,604 30,732

Net Profit before Except. 14,743 22,727 22,371 26,604 30,732

EBITDA 34,439 45,339 45,853 51,136 55,635

Growth

Revenue Gth (%) 0.3 (27.3) (14.0) 12.5 4.0

EBITDA Gth (%) (38.9) 31.7 1.1 11.5 8.8

Opg Profit Gth (%) (55.9) 53.6 (3.6) 19.6 14.0

Net Profit Gth (Pre-ex) (%) (56.1) 54.1 (1.6) 18.9 15.5

Margins & Ratio

Gross Margins (%) 5.2 9.2 10.6 10.6 11.3

Opg Profit Margin (%) 3.0 6.4 7.2 7.6 8.4

Net Profit Margin (%) 2.8 5.1 6.5 6.8 7.6

ROAE (%) 6.6 9.0 9.5 10.7 11.6

ROA (%) 3.8 5.4 6.0 7.1 8.0

ROCE (%) 2.8 5.4 5.4 6.7 7.7

Div Payout Ratio (%) 69.5 61.6 56.4 47.5 45.5

Net Interest Cover (x) 3.8 6.5 7.2 9.6 12.7



Page 5

Company Guide

PTT Global Chemical


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Revenue 94,466 96,909 81,473 66,385 90,554


Gross Profit 6,311 7,966 7,618 8,323 9,165



Other Non Opg (Exp)/Inc 201 1,635 269 283 1,405

Associates & JV Inc 485 (209) 178 53.0 168


Exceptional Gain/(Loss) (2,087) 399 675 102 309

Pre-tax Profit 1,077 5,542 5,362 5,283 7,331

Tax 216 (769) (623) (380) (1,022)

Minority Interest (86.1) (83.5) (31.9) 21.4 (82.9)

Net Profit 1,207 4,690 4,707 4,924 6,226

Net profit bef Except. 3,294 4,291 4,032 4,823 5,917

EBITDA 8,300 10,336 9,636 10,159 12,377

Growth

Revenue Gth (%) (15.6) 2.6 (15.9) (18.5) 36.4

EBITDA Gth (%) (47.2) 24.5 (6.8) 5.4 21.8

Opg Profit Gth (%) (69.7) 35.4 8.8 12.2 11.2

Net Profit Gth (Pre-ex) (%) (66.6) 30.3 (6.0) 19.6 22.7

Margins

Gross Margins (%) 6.7 8.2 9.4 12.5 10.1


Net Profit Margins (%) 1.3 4.8 5.8 7.4 6.9

Balance Sheet (Btm)

FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 219,346 220,213 216,208 207,894 199,524


Other LT Assets 15,781 15,929 14,879 13,933 13,082

Cash & ST Invts 45,788 47,741 47,418 51,659 71,314

Inventory 31,577 29,930 22,955 25,649 26,224

Debtors 43,441 38,274 37,969 40,523 40,042


Total Assets 381,443 377,545 370,456 376,254 392,350

ST Debt

23,467 9,871 14,817 7,017 5,977

Creditor 21,679 19,650 15,424 17,011 17,500


LT Debt 89,675 95,976 85,913 83,650 82,427



Minority Interests 3,687 2,713 3,000 3,295 3,599

Total Cap. & Liab. 381,443 377,545 370,456 376,254 392,350


Net Cash/(Debt) (67,355) (58,106) (53,312) (39,008) (17,090)




Asset Turnover (x) 1.4 1.1 0.9 1.0 1.1

Current Ratio (x) 2.2 2.9 3.2 4.3 5.1

Quick Ratio (x) 1.6 2.1 2.5 3.3 4.1

Net Debt/Equity (X) 0.3 0.2 0.2 0.2 0.1


Capex to Debt (%) 15.3 16.8 12.7 9.9 10.5

Z-Score (X) 3.5 3.3 3.4 3.7 3.8



Page 6

Company Guide

PTT Global Chemical


FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 14,673 22,765 24,566 29,809 34,405

Dep. & Amort. 15,942 16,385 17,835 18,224 18,545

Tax Paid 0.0 0.0 0.0 0.0 0.0

Assoc. & JV Inc/(loss) (177) (711) (711) (711) (711)

Chg in Wkg.Cap. 12,639 5,882 (4,725) (3,662) 396

Other Operating CF (53.3) 5,715 (1,484) (2,494) (2,963)

Net Operating CF 43,023 50,036 35,481 41,166 49,672

Capital Exp.(net) (17,304) (17,746) (12,780) (8,964) (9,324)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV (10,638) (316) (5,569) (5,569) (5,569)

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF 3,805 (4,283) 0.0 0.0 0.0

Net Investing CF (24,137) (22,345) (18,349) (14,533) (14,893)

Div Paid (15,094) (11,765) (12,625) (12,625) (13,166)

Chg in Gross Debt (4,898) (7,296) (5,117) (10,063) (2,263)

Capital Issues (41.6) 0.0 0.0 0.0 0.0


Net Financing CF (23,648) (30,028) (17,455) (22,393) (15,125)


Chg in Cash (4,763) (2,337) (323) 4,241 19,655

Opg CFPS (Bt) 6.74 9.79 8.92 9.94 10.9

Free CFPS (Bt) 5.70 7.16 5.03 7.14 8.95



Source: DBS Vickers


THAI-CAC Certified



Score Description






90-100 Excellent

80-89 Very Good

70-79 Good

60-69 Satisfactory

50-59 Pass

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:CS, PY

HOLD Last Traded Price ( 8 Feb 2017): Bt72.75 (SET : 1,589.29)


Potential Catalyst: Strong performance in 4Q16

Where we differ: We are more conservative on product spread Analyst Chaipat THANAWATTANO +66 2657 7827 [email protected]

Price Relative


Revenue 293,569 257,488 284,623 309,329 EBITDA 25,567 28,899 28,951 30,761 Pre-tax Profit 14,102 19,124 17,624 19,594 Net Profit 12,181 16,840 14,656 16,331 Net Pft (Pre Ex.) 13,446 15,540 14,656 16,331 Net Pft Gth (Pre-ex) (%) nm 15.6 (5.7) 11.4 EPS (Bt) 5.97 8.25 7.18 8.01 EPS Pre Ex. (Bt) 6.59 7.62 7.18 8.01 EPS Gth Pre Ex (%) nm 16 (6) 11 Diluted EPS (Bt) 5.97 8.25 7.18 8.01 Net DPS (Bt) 2.70 3.80 3.30 3.70 BV Per Share (Bt) 45.3 50.6 54.1 58.7 PE (X) 12.2 8.8 10.1 9.1 PE Pre Ex. (X) 11.0 9.6 10.1 9.1 P/Cash Flow (X) 4.7 5.5 6.4 6.8 EV/EBITDA (X) 6.9 5.7 5.2 4.4 Net Div Yield (%) 3.7 5.2 4.5 5.1 P/Book Value (X) 1.6 1.4 1.3 1.2 Net Debt/Equity (X) 0.2 0.1 CASH CASH ROAE (%) 13.9 17.2 13.7 14.2 Earnings Rev (%): 0 0 0 Consensus EPS (Bt): 8.71 7.46 7.31 Other Broker Recs: B: 9 S: 6 H: 12


TP is raised but still not attractive TP is raised to Bt77/sh. We raised our TP for TOP by 18% after assigning a higher PBV multiple amid an oil price recovery but our HOLD call is unchanged given the lack of new share price catalyst. The strong earnings performance in 4Q16E could increase investor interest in the near term but a repeat strong earnings showing in 2017F is still not in our view. We believe more capacity in the region, both oil refinery and aromatics, is likely to limit the upside. 4Q16E profit is expected to improve q-o-q but flat y-o-y. TOP is likely to report its earnings on Feb 15 which would show ongoing q-o-q improvement due to better market GRM and potential inventory gains. Nonetheless, this could be partly offset by FX losses given its USD loans and bonds of US$1.2bn. Note that the full-year performance could exceed our forecast but this should be priced in, in our view. Investment in new refinery would be concluded by end-2017. The final investment decision for its new oil refinery could be made by the end of this year and we expect the new refinery to start operation in 2021-22 at the earliest, based on a construction period of 4-5 years. Excluding this project, the company has committed capex of US$320m during 2017-18F, mainly for the efficiency improvement of its existing operation. It still has plenty of cash on hand (US$1.3bn), together with cash flow from operation of US$600-700m per annum, for new investments. Valuation:

We apply a higher P/BV multiple to derive a new TP of Bt77 for

TOP. The P/BV is raised from 1.3x to 1.4x to reflect the average

trading multiple during the last oil price recovery. Nonetheless,

this still offers limited capital gains to investors from the

current price, though the dividend yield of 4-5% for 2016-17F

is still attractive.

Key Risks to Our View: Lower-than-expected GRM is the key risk factor as new

capacity in the region will continue to put more pressure on

margins. This is due to the huge incoming new capacity in the

Middle East, China and India, especially for diesel. At A Glance Issued Capital (m shrs) 2,040

Mkt. Cap (Btm/US$m) 148,412 / 4,238


PTT 49.1

Thai NVDR 5.5

State Street Bank Europe Limited 3.2

Free Float (%) 45.8




9 Feb 2017


Thai Oil PCL Version 5 | Bloomberg: TOP TB | Reuters: TOP.BK Refer to important disclosures at the end of this report


Page 2

Company Guide

Thai Oil PCL


Earnings Drivers:

Stock gain during higher crude oil prices could be offset by rise

in operating cost. Although higher oil prices could provide a

near-term boost for TOP’s earnings due to stock gains, this

could be offset by higher operating cost from fuel used and loss

in the process, which is usually at 3% of total crude intake. In

addition, the wider spread between light and heavy crude oil

price could also increase TOP’s crude premium.

GIM to normalise in 2016-18F. We expect its GIM to soften to

more sustainable levels of US$7.7-8.4/bbl in 2016-18F after a

strong increase in 2015 to US$9.1/bbl. This would be driven by

the favourable GRM of the oil refining segment as a result of

high demand for gasoline. This is on the account of low crack

spread for middle distillate products (diesel and jet fuel) given

the weaker demand and more supply in the region.

PX spread should remain under pressure. Our PX spread for

2016-18F appeared to be conservative at US$250/t, compared

with US$320/t for 9M16. This reflected lower-than-expected

new supply in the region due to delayed start-up of new plants

in Asia. Additional supply from new aromatics plants in Asia

would continue to enter the market from 4Q16-2017 which

could increase pressure on the PX spread. Meanwhile, demand

could soften due to China's slowing economy. Cost-saving

programmes helped the operating performance of the

aromatics business to improve strongly in 2015-16 but the

upside to this should be limited, in our view.

High utilisation rate reflects well-maintained plants. TOP was

able to fully utilise its refinery in the past few years even during

the planned turnaround in 2014 when it could operate at 98%.

This was due to its well-maintained refinery and aromatics

plant. We expect utilisation to remain at 100% in the medium

term for the oil refinery. Nonetheless, the utilisation rate of

aromatics plants should be stable at 81% in order to optimise

the integrated margin as the PX spread would remain under

pressure due to abundant supply in the region.

New investment for refinery is under study. TOP is conducting a

feasibility study on a new 200-kbd refinery in Thailand to

replace its 50-year-old facilities at Sri Racha. The investment

would also increase total capacity from 275kbd to 400kbd with

higher energy efficiency and zero fuel oil products. The total

investment should be cheaper than for a greenfield project

because it would be able to share several facilities with the

current plant. If the project is given the green light, the plant

will go onstream in 2021-22 at the earliest. We believe the

project has been revived, as TOP does not have any investments

in the pipeline currently, and the company is in a stronger

financial position and has more headroom for debt.

Dubai crude oil (US$/bbl)

Avg. market GIM (US$/bbl)

PX spread vs. ULG95 (US$/t)

Utilization rate - refinery (%)

Utilization rate - petchem (%)



Page 3

Company Guide

Thai Oil PCL

Balance Sheet:

Stronger financial position than during the previous crisis. TOP’s

balance sheet is much stronger now than during the last global

financial crisis in 2008-09. Its net debt/equity fell from 0.5x in

2009 to 0.2x in 2015. We estimate the ratio to decline further

and to be in net cash in 2017 despite the planned capex.

However, the gross gearing ratio should decline more slowly as

the company has pre-funded its investment plan and debt

repayment with US$1bn debentures issued in 2013 with

coupon rates of 3.625-4.875% for 10 and 30 years. This would

be the key factor for its potential FX losses in 2017-18F as the

Thai baht could weaken against USD if a US interest rate hike

takes place.


Recovery of GRM from economic recovery and higher demand.

We expect gross refining margin (GRM) to recover in 2017 on

stronger demand, especially for middle distillates which reflects

better global economic outlook. Also, we expect the crack

spread of gasoline to improve on better balance of demand and

supply. The strong crack spread of this product was the main

factor behind the favourable market GRM in 2015-early 2016

but the magnitude of increase for this year could be eroded by

additional supply as regional refiners have maximised their

gasoline output to accommodate strong demand in the market.

Nonetheless, this should be limited given the configuration of

each refinery.

Higher oil price could boost near-term earnings from stock

gains. We estimate TOP could book stock gains in 4Q16E from

higher crude oil prices. We estimate that for every US$10/bbl

increase of crude oil price from end-3Q16, TOP could post an

inventory gain of US$29m (c.Bt1bn). This could be the upside

surprise for our earnings forecast.

Key Risks:

Lower-than-expected GRM is the key risk factor as new

capacity in the region will continue to put more pressure on

margins. This is due to the huge incoming new capacity in the

Middle East, China and India, especially for diesel. Additional

capacity of 1mbpd in 2016 and 2.5mbpd in 2017 are expected

to come onstream, compared with demand growth of

c.1mbpd each year. This would be partly offset by some

refinery closures during the period.

Company Background

Thai Oil is Thailand's largest and most complex refinery, and

the flagship refinery under PTT group. The refinery is

integrated with petrochemicals and lube base plants. TOP also

invests in other related businesses, including marine

transportation for petroleum products, ethanol and power

plants.


Capital Expenditure

ROE (%)

EBITDA breakdown (9M16)

PB Band (x)


Refinery67%

Aromatics16%

Lube Base Oil8%

Power Generation

5%Others

4%


Page 4

Company Guide

Thai Oil PCL

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F

Dubai crude oil (US$/bbl) 96.6 50.9 42.0 52.0 57.0

Avg. market GIM (US$/bbl)

6.20 9.10 7.71 7.81 8.43 PX spread vs. ULG95 (US$/t)

279 250 250 250 250

Utilization rate - refinery (%)

98.0 108 105 105 105

Utilization rate - petchem (%)

82.0 81.0 81.0 81.0 81.0


FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 390,090 293,569 257,488 284,623 309,329


Gross Profit (4,080) 19,750 21,848 21,982 24,012


Operating Profit (6,722) 16,543 19,451 19,045 20,805

Other Non Opg (Exp)/Inc 2,085 1,546 1,314 1,546 1,546


Net Interest (Exp)/Inc (3,966) (3,435) (3,903) (3,930) (3,720)

Exceptional Gain/(Loss) 3,214 (1,264) 1,300 0.0 0.0

Pre-tax Profit (4,759) 14,102 19,124 17,624 19,594

Tax 920 (1,597) (1,816) (2,499) (2,795)

Minority Interest (301) (323) (468) (468) (468)


Net Profit (4,140) 12,181 16,840 14,656 16,331

Net Profit before Except. (7,354) 13,446 15,540 14,656 16,331

EBITDA 2,526 25,567 28,899 28,951 30,761

Growth

Revenue Gth (%) (5.9) (24.7) (12.3) 10.5 8.7

EBITDA Gth (%) (89.1) 912.3 13.0 0.2 6.3

Opg Profit Gth (%) nm nm 17.6 (2.1) 9.2

Net Profit Gth (Pre-ex) (%) nm nm 15.6 (5.7) 11.4

Margins & Ratio

Gross Margins (%) (1.0) 6.7 8.5 7.7 7.8

Opg Profit Margin (%) (1.7) 5.6 7.6 6.7 6.7

Net Profit Margin (%) (1.1) 4.1 6.5 5.1 5.3

ROAE (%) (4.7) 13.9 17.2 13.7 14.2

ROA (%) (2.1) 6.3 8.5 7.0 7.6

ROCE (%) (7.1) 6.0 6.4 5.7 6.5

Div Payout Ratio (%) N/A 45.2 46.0 45.9 46.2

Net Interest Cover (x) (1.7) 4.8 5.0 4.8 5.6



Page 5

Company Guide

Thai Oil PCL


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Revenue 74,721 68,446 56,790 72,368 68,476


Gross Profit 993 4,372 5,224 9,361 3,751

Other Oper. (Exp)/Inc (668) (1,060) (509) (667) (629)

Operating Profit 325 3,312 4,715 8,694 3,122

Other Non Opg (Exp)/Inc 478 238 265 547 288



Exceptional Gain/(Loss) (2,021) 1,371 715 (36.4) 725

Pre-tax Profit (1,908) 4,381 5,195 8,537 3,497

Tax (317) (566) (363) (688) (451)

Minority Interest (68.9) (65.9) (106) (96.8) (105)

Net Profit (2,294) 3,749 4,726 7,753 2,941

Net profit bef Except. (273) 2,378 4,011 7,789 2,216

EBITDA 2,750 5,470 7,127 11,347 5,649

Growth

Revenue Gth (%) (5.5) (8.4) (17.0) 27.4 (5.4)

EBITDA Gth (%) (74.2) 98.9 30.3 59.2 (50.2)

Opg Profit Gth (%) (96.2) 920.4 42.4 84.4 (64.1)

Net Profit Gth (Pre-ex) (%) nm nm 68.7 94.2 (71.5)

Margins

Gross Margins (%) 1.3 6.4 9.2 12.9 5.5


Net Profit Margins (%) (3.1) 5.5 8.3 10.7 4.3

Balance Sheet (Btm)

FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 79,120 83,258 84,841 78,975 73,059


Other LT Assets 5,910 4,977 5,937 5,626 5,311

Cash & ST Invts 46,483 53,129 64,001 74,778 84,688

Inventory 28,533 18,883 23,758 23,192 25,560

Debtors 16,141 14,177 10,582 11,697 12,712


Total Assets 193,607 192,166 206,335 212,190 220,131

ST Debt

1,247 1,787 4,113 4,113 5,113

Creditor 17,811 12,053 15,649 17,482 19,032


LT Debt 67,265 73,719 70,019 66,319 61,619



Minority Interests 4,448 4,637 5,105 5,574 6,042

Total Cap. & Liab. 193,607 192,166 206,335 212,190 220,131


Net Cash/(Debt) (22,029) (22,377) (10,131) 4,345 17,956




Asset Turnover (x) 1.9 1.5 1.3 1.4 1.4

Current Ratio (x) 2.7 5.0 4.3 4.4 4.4

Quick Ratio (x) 1.8 3.7 3.1 3.3 3.4

Net Debt/Equity (X) 0.3 0.2 0.1 CASH CASH

Net Debt/Equity ex MI (X) 0.3 0.2 0.1 CASH CASH

Capex to Debt (%) 27.3 14.4 11.3 1.4 1.5

Z-Score (X) 3.6 3.7 3.5 3.6 3.8



Page 6

Company Guide

Thai Oil PCL


FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit (4,759) 14,102 19,124 17,624 19,594

Dep. & Amort. 6,533 6,766 7,172 7,398 7,448

Tax Paid 920 (1,597) (1,816) (2,499) (2,795)

Assoc. & JV Inc/(loss) (630) (712) (962) (962) (962)

Chg in Wkg.Cap. 1,106 999 421 483 644

Other Operating CF 21,185 12,181 2,826 1,187 (2,177)

Net Operating CF 24,356 31,738 26,765 23,230 21,752

Capital Exp.(net) (18,679) (10,867) (8,398) (1,000) (1,000)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV (1,392) (327) (674) (674) (674)

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF (275) 13,724 0.0 0.0 0.0

Net Investing CF (20,346) 2,530 (9,072) (1,674) (1,674)

Div Paid (4,242) (3,194) (5,916) (7,548) (6,936)

Chg in Gross Debt 5,979 6,994 (1,374) (3,700) (3,700)

Capital Issues 0.0 0.0 0.0 0.0 0.0


Net Financing CF (3,075) (14,740) (6,822) (10,780) (10,168)


Chg in Cash 934 19,527 10,872 10,777 9,910

Opg CFPS (Bt) 11.4 15.1 12.9 11.2 10.3

Free CFPS (Bt) 2.78 10.2 9.00 10.9 10.2



Source: DBS Vickers


THAI-CAC Certified



Score Description



Corporate Governance CG Rating is based on Thai Institute of Directors (IOD)’s annual assessment of corporate governance practices of listed companies. The assessment covers 235 criteria in five categories including board responsibilities (35% weighting), disclosure and transparency (20%), role of stakeholders (20%), equitable treatment of shareholders (10%) and rights of shareholders (15%). The IOD then assigns numbers of logos to each company based on their scoring as follows:


90-100 Excellent

80-89 Very Good

70-79 Good

60-69 Satisfactory

50-59 Pass


Industry Focus

Page 7

DBS Vickers recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

Completed Date: 9 Feb 2017 06:12:15 (THA) Dissemination Date: 9 Feb 2017 06:49:26 (THA)

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Industry Focus

Page 8

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Industry Focus

Page 9

Wong Ming Tek, Executive Director, ADBSR

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DBS Vickers Securities (Thailand) Co, Ltd

989 Siam Piwat Tower Building, 9th, 14th-15th Floor Rama 1 Road, Pathumwan, Bangkok Thailand 10330

Tel. 66 2 657 7831, Fax: 66 2 658 1269 Company Regn. No 0105539127012

Securities and Exchange Commission, Thailand.

thailand industry focus thailand oil refinery us shale drillers if prices move towards more...

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